| WASHINGTON, March 27
WASHINGTON, March 27 U.S. corporate governance
rules make it too easy for activist investors to get politically
driven shareholder proposals onto public company ballots and
should be overhauled, a top U.S. Securities and Exchange
Commission official said Thursday.
"Activist investors and corporate gadflies have used these
loose rules to hijack the shareholder proposal system," said SEC
Republican Commissioner Daniel Gallagher, in prepared remarks
for a conference at Tulane University Law School in New Orleans.
"The vast majority of proposals are brought by individuals
or institutions with idiosyncratic and often political agendas
that are...unrelated to, or in conflict with, the interests of
other shareholders," he added.
The SEC is in charge of enforcing the rules that govern
communications with shareholders over proxy voting solicitation.
Under current rules, a shareholder who has owned $2,000, or
one percent of the company's stock for a year is generally
allowed to include a proposal on the ballot as long as certain
conditions are met.
Proposals that raise ordinary business concerns, for
instance, are typically not permitted on the ballot, unless they
give rise to significant policy issues.
When companies and shareholders disagree as to whether a
proposal can be excluded or not, the SEC staff acts as an
arbiter between the two.
In his speech, Gallagher said it is "inexcusable" that the
SEC'S rules are often forcing shareholders who may be saving for
retirement or college to "subsidize activist agendas".
He proposed some reforms to make it harder for groups like
organized labor to get their proposals on the agenda.
For starters, he said, the $2,000 stock ownership threshold
is "absurdly low". And while the SEC could raise the figure to
$200,000 or even $2 million, he said instead the SEC needs to do
more economic analysis and come up with a percentage threshold
that is based on a company's size.
Moreover, he said it is problematic that the SEC rules also
allow these proposals to be easily resubmitted on future
ballots, because they only need anywhere between 3 and 10
percent of the votes to reappear, depending on how many times in
the prior five years they were brought.
The SEC's resubmission policy, he said, should perhaps be a
"three strikes and you're out" approach.
In addition, Gallagher said he's troubled by the way the SEC
polices the substance of shareholder proposals.
Many proposals that the SEC has permitted to appear on
corporate ballots because they were deemed a significant policy
issue have been dubious, he said.
One such example, he said, involved a February 2013 decision
in which SEC staff told PNC Bank it could not exclude a
shareholder proposal by Boston Common Asset Management to
require the company board to report greenhouse gas emissions
that were resulting from its portfolio.
In that matter, the SEC declared that climate change is a
significant policy issue and therefore the proposal could appear
on the ballot.
Gallagher said the SEC's rules defining what constitutes a
significant policy matter are too vague. In addition, he added
that the agency's five presidentially appointed commissioners,
and not staff, should have the final say.
Whether any of Gallagher's ideas can get traction at the SEC
remains to be seen. Only the agency's Chair, Mary Jo White, can
set the policy agenda, and not all of his peers on the
commission are like-minded.
(Reporting by Sarah N. Lynch; Editng by Stephen Powell)